German government bond yields fall to 2-week lows

Recasts lead, updates prices

By Harry Robertson

LONDON, Feb 27 (Reuters) - German government bond yields fell to a two-week low on Thursday, pulled down by concerns about the bloc's economy.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, fell to 2.412%, the lowest since February 11, and was last down 2 basis points (bps) at 2.42%. Yields move inversely to prices.

European stocks fell after a threat from U.S. President Donald Trump to impose 25% tariffs on imports from the region.

Euro zone bond yields rose in mid-February as investors braced for more defence spending as U.S. President Donald Trump embarked on talks with Russia over ending the war in Ukraine.

But they have since dipped, influenced in part by a sharp drop in U.S. Treasury yields as weak private sector and consumer sentiment data has surprised investors, and also as incoming German Chancellor Friedrich Merz has cast doubt on a big military spending boost in the country.

Analysts argued that an increase in fiscal spending in Germany could boost the economy across the euro area.

​Italy's 10-year yield IT10YT=RR was 0.5 bps higher at 3.50%, and the gap between Italian and German yields DE10IT10=RR widened to 107 bps.

Spanish inflation came in slightly stronger than expected in February, at 2.9%.

Separate European Commission figures showed euro zone economic sentiment improved in February, with consumer price expectations moving higher.

"Surveys so far this year, including Thursday's EC survey for February, suggest the economy remains very weak while inflationary pressures are still somewhat elevated," said Adrian Prettejohn, Europe economist at Capital Economics.

He said price pressures may worry ECB policymakers. They meet next week to decide on interest rates and markets are expecting another 25 bp cut, to 2.5%, and see two or three more reductions after that.

The accounts of the ECB's January 29-30 meeting showed there were still some worries about inflation, warranting caution in signalling further policy easing.

The spread between U.S. 10-year Treasuries and German yields DE10US10=RR widened to 187 bps after falling to its lowest since November at 182 bps on Wednesday.

Traders who bet on the future course of inflation foresee the sharpest divergence for three years between the U.S. and euro zone, partly driven by Trump's tariff threats, which he renewed on Wednesday.

Yet the spread between U.S. and European yields has narrowed as investors focus on recent tepid U.S. economic data, despite sticky prices, and more euro zone defence spending.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was last down 3 bps at 2.04%, after hitting 2.033%, its lowest level since February 11.